Maintaining long term value Market cycles come and go, but gold has maintained its long term value. Jastram (1977) demonstrated that in inflationary and deflationary times, in the very long term, gold kept its purchasing power.
The value of gold, in terms of real goods and services that it can buy, has remained remarkably stable. In contrast, the purchasing power of many currencies has generally declined.
This is why gold is often bought: to counter the effects of inflation and currency fluctuations. Harmston (1998) concluded that over the long term, in spite of price fluctuations:
Gold has consistently reverted to its historic purchasing power parity Gold has proved to an effective preserver of wealth During periods of financial, economic and social turmoil, gold has been a safe refuge when the value of other assets was all but destroyed And a working paper published by the University of Stirling in 2000 says that while in the short run the effectiveness of using gold as an inflation hedge may vary, in the long run, it remains a reliable store of value.
Gold as a safe haven
Gold is among only a handful of financial assets that is not matched by a liability. It can provide 'insurance' against extreme movements on the value of traditional asset classes that can happen in unsettled times.
In fact, statistical analysis shows that over the past thirty years, the correlation between gold and the Dow Jones Industrial Average actually declined during the worst 30 months of the equity index – an indication that investors in gold had the protection they sought when they needed it the most.
Some recent examples of the refuge afforded by gold include:
In 1997/98 the Government of South Korea asked its citizens to allow it to buy their gold holdings in exchange for local currency debt instruments. The Government raised over five million ounces of gold in this way which it sold for hard currency. As a result it was able to service its external debt. Fearful of the implications of the forecast electronic and communications disaster surrounding Y2K, there was a flight to gold in 1999. The first quarter of 2002 saw a flight to gold by Japanese investors as they awaited the withdrawal of government guarantees on bank deposits.
